INTERNATIONAL FINANCIAL MANAGEMENT

Case 2: International Financial Management



Case 2: International Financial Management

1. Timeline of the Order

1st Event - Hungarian Customer ordered a Quotation for smoked Salmon

2nd Event - Smoked Salmon Ordered.

3rd Event - Bank Guarantee or Bank LC is opened in favor of Kropotkin in order to secure the payment. The order payment is not secured by the government because the government doesn't take responsibility for luxury goods.

4th Event - Smoked Salmon Shipped

5th Event - Payment Received after 90 Days.

2. Analysis of the foreign exchange and interest rate exposures

The foreign exchange exposure us known as the impact of unanticipated changes in the real exchange rate. There are multiple dynamics of the foreign exchange exposures. One exposure is the value assets that have fixed payoff which is nominal and the value of the real assets which are held by the company. The first level exposure is the exposure towards the foreign assets which are exposed due to risk of the inflation uncertainty. In times of economic instability, investors should analyze more carefully the variables that affect the results of the companies and the steps they are taking to guard against eventualities that may affect your business. Whereas much of Brazilian companies have foreign currency transactions or operations outside the country, the currency risk is one that leaves them more susceptible. Companies with business overseas are subject to two types of currency risk: the book, which occurs when a company has assets or liabilities abroad and need to convert their value to local currency and the transaction, which is subject companies with revenues or costs in foreign currencies and may have the value of contracts in local currency changed between the time of hire and date of payment. The investor must be aware of the type and direction of currency risk to which companies are exposed. An exporting company, whose majority of revenue is in dollars, for example, suffers from the appreciation of the real. Have an importer will benefit (Tai, 2000, p.398).

Transaction Exposure

Transaction exposure is another type of foreign exchange exposure. The risk involves changes in the value of the financial obligations mainly due to the movements in the exchanges rates. The exposure to the risk is increased or decreased by the amount of sales which are exported to the international countries as compared to domestic sales. When selling in the international markets the companies is unable manage the foreign exchange exposure which is not using proper instruments in order to hedge the risks arising due to volatility in the foreign exchange risk. The principle which has been widely accepted as a fact that the country which has an appreciating exchange risk is always at a risk because the exchange rate have been increasing and the prices of the goods are also increasing in other countries where the product have been exported. The company which maintains credit accounts with the customers also faces such issues because the exchange rate changes during the tenure and the company faces ...